Gifting - Review Questions

Question 1

Gerald Carter owns an asset which is worth $100,000 today. It is anticipated that the asset will appreciate at the rate of 10% per year, i.e., in 10 years it will be worth approximately $260,000. If the property is given away now, the gift tax is computed on the $_________ (less the annual exclusion if allowable).

Answer 1

$100,000 is the correct answer. If the asset is not given away and it becomes part of the estate (ten years from today), the estate tax is computed on approximately $260,000. Thus, a gift made currently removes future appreciation from the estate.

Question 2

If the spouses are still married, the entire gift is returned to the community estate. However, if the community has been terminated by divorce or death, what percentages of the gift will the spouse have the right to recapture?

Choose the best answer.

1) 20 percent
2) 50 percent
3) 80 percent
4) 100 percent

Answer 2

2) 50 percent

Question 3

The tax rates are applied to ______ _______ taxable gifts rather than only to taxable gifts made in the current calendar year.

Answer 3

total lifetime

The tax rates are applied to total lifetime taxable gifts. The gift tax is based on the value of the property transferred. It is computed on a progressive schedule based on cumulative lifetime gifts.

Question 4

Which of the following choices would be included in a broad definition of a gift? (Check all that are true.)

1) transfers of partnership interests
2) cancellation of a debt
3) gifts of royalty rights
4) gifts of checks or notes to third parties

Answer 4

1) transfers of partnership interests
2) cancellation of a debt
3) gifts of royalty rights
4) gifts of checks or notes to third parties

All of the choices are included in the definition of a gift. Even the forgiving of a note or cancellation of a debt may constitute a gift.

Question 5

A gratuitous transfer of property by a family-owned corporation to the father of the shareholders of a corporation could be treated as a gift from which of the following choices?

Choose the best answer.

1) Children to their father
2) Children to the corporation
3) Father to his children
4) Father to the corporation

Answer 5

1) Children to their father.

A gratuitous transfer of property by a family-owned corporation to the father of the shareholders of a corporation could be treated as a gift from the children to their father.

Question 6

Does the right to use property such as money at no charge constitute a gift of property?

Answer 6

Yes, interest-free and below-market-rate loans are treated as taxable gifts. A gift tax is imposed on the value of the right to use the borrowed money, the so-called foregone interest, generally the going rate of interest the money could earn in the given situation.

Question 7

A father transferred property to his children at a price below the fair market value. In return he received non-interest-bearing notes rather than cash, and on the children’s behalf he continued to make certain payments with respect to the property. Do you think the IRS would constitute this as a gift?

Answer 7

The court found these actions showed that in reality he was not dealing with his children at arm’s length. It is possible that the same result could occur if the father employed the son at a wage of $50,000 a year but the son rendered services worth only $20,000 a year. The IRS could claim that the $30,000 difference constituted a gift.

Question 8

A well-known golfer contracted with a company to make pictures depicting his form and golf style. In return the golfer was to receive a lump sum of $120,000 plus a 50 percent royalty on the earnings of the picture. But before any pictures were made, he sold his father the right to his services for $1. The father, in turn, transferred the rights to the contract to a trust for his son’s three children. The income would be taxable to whom?

Choose the best answer.

1) the company
2) the golfer
3) the father
4) the three children

Answer 8

2) the golfer

The court held that the entire series of transactions had no tax effect and that the income was completely taxable to the golfer .

Question 9

If a grandmother purchases a U.S. savings bond that is registered as payable to her and to her two children as co-owners, no gift is made to the grandchildren until one of them ___________ the bond for cash

Answer 9

No gift is made to the grandchildren until one of them surrenders the bond for cash. Federal rather than state law governs transfer of U.S. government bonds. Even if state law requirements for a valid gift are met, for tax purposes no completed gift has been made until the registration is changed in accordance with federal regulations.

Question 10

There are certain valuation problems unique to the gift tax. What are these problems associated with?

Answer 10

Indebtedness with respect to transferred property
Restrictions on the use or disposition of property
Transfers of large blocks of stock
Valuation of mutual fund shares
Valuation of life insurance and annuity contracts

Question 11

Let’s assume the donor transfers a $100,000 building subject to a $40,000 mortgage on which he or she is personally liable. The donor’s creditors collect the $40,000 by proceeding against the pledged building and the donee is subrogated to that creditor’s rights against the donor-debtor. Effectively, the donee now stands in the shoes of the creditor. How much more can the donee collect from the donor?

Choose the best answer.

1) $0
2) $40,000
3) $80,000
4) $100,000

Answer 11

2) $40,000

The donee can collect an additional $40,000 from the donor.

Question 12

Chris established an irrevocable trust for his two sons and four grandchildren. He funded the trust with $2 million of securities. The income is payable to his sons for life and the remainder in trust will be distributed to his grandchildren. One son is addicted to opioids and Chris retains the power to withhold distributions to him and to vary the amount of trust income distributed to each son in a given year. Chris also has the power to change the beneficiaries of the trust. What are the tax consequences to Chris for establishing this trust?

1) The transfer of securities to the trust is a taxable gift.
2) The trust assets are removed from Chris’s estate.
3) The transfer of securities to the trust is an incomplete, non-taxable gift.
4) The trust assets will be included in Chris’s estate.

Answer 12

3) The transfer of securities to the trust is an incomplete, non-taxable gift.
4) The trust assets will be included in Chris’s estate.

The transfer of securities to the trust is an incomplete, non-taxable gift; and the trust assets will be included in Chris’s estate. Chris created an irrevocable trust but retained the right to exercise control over the trust assets. Therefore the transfer of securities to the trust is an incomplete gift. The fair market value of the trust will be included in Chris’s estate when he dies assuming he does not relinquish control over the trust prior to his death.

Question 13

Susan gifted her life insurance policy to her best friend Beth. From a gift tax perspective, what value would Susan use for the value of the gift?

1) Value of the death benefit
2) cash value in the policy
3) cash value plus unearned premium
4) the replacement cost

Answer 13

4) the replacement cost

In the case of a whole life policy, the value of the gift is generally equal to the interpolated terminal reserve plus unearned premium at the date of the gift.

Question 14

Which of the following does the IRS not consider a gift?

1) Payment made to a grandchild for tuition
2) Reimbursement to your father for medical expenses paid
3) Gratuitous services
4) Buying a car for a friend

Answer 14

3) Gratuitous services

The IRS does not consider gratuitous services and promises to make a gift as subject to gift tax. Direct payment of tuition made to a school for a grandson is a qualified gift which is exempt from gift taxes. Money given to a grandchild to pay for tuition is subject to gift taxes.

Question 15

All of the following are requirements for a disclaimer except?

1) The refusal or rejection of the benefits must be in writing
2) The date of the person disclaiming has to be over 21 years old
3) The written rejection must be received by the transferor no later than 9 months
4) You may have benefited from the property prior to the disclaimer

Answer 15

4) You may have benefited from the property prior to the disclaimer

You may NOT have benefited or accepted the property prior to disclaiming the property..

Question 16

Wes loaned his daughter $100,000. She has agreed to pay him $10,000 note each year for 10 years. Which technique could Wes use to cancel the annual payment due by making a gift to his daughter equal to the amount of the payment due each year?

1) Promise to make a gift
2) Blockage Rule
3) Cancellation of Notes
4) Assignment of Income

Answer 16

3) Cancellation of Notes

Cancellation Notes – Each year that the notes become due, Wes marks the note “cancelled by gift.” The gift would occur each year that he cancelled the note .

Question 17

Which of the following is not a factor to consider when determining the intent to make a gift?

1) Was the donor legally competent to make the gift?
2) Was there clear acceptance of the gift by the donee?
3) Full consideration was provided to the seller
4) A delivery to the donee of the subject matter of the gift or the most effective way to command dominion and
control of the gift.

Answer 17

3) Full consideration was provided to the seller

If full consideration was given, then it would not qualify as a gift rather a legal transaction between a buyer and a seller.

Question 18

Gifts can take many different forms. Which of the following is a form of a gift?

1) Mowing your neighbor’s lawn
2) Babysitting your sister’s children for 3 hours
3) Paying your grandson’s tuition
4) Walking your neighbor’s dog for a week